Financial Management: Test 2

Dividend yield + Capital gains yield

he required return on a stock is equal to which one of the following if the dividend on the stock decreases by a constant percent per year?

yield to maturity decreases

All else held constant, the present value of a bond increases when the:

Dealer

An agent who buys and sells securities from inventory is called a:

Interest rate risk premium

Changes in interest rates affect bond prices. Which one of the following compensates bond investors for this risk?

$12.16

Healthy Foods just paid its annual dividend of $1.62 a share. The firm recently announced that all future dividends will be increased by 2.1 percent annually. What is one share of this stock worth to you if you require a rate of return of 15.7 percent?

$3.90

Horseshoe Stables is losing significant market share and thus its managers have decided to decrease the firm's annual dividend. The last annual dividend was $.86 a share but all future dividends will be decreased by 3.5 percent annually. What is a share of this stock worth today at a required return of 17.8 percent?

6.95 percent

National Distributors has $1,000 face value bonds outstanding with a market price of $1,013. The bonds pay interest semiannually, mature in 11 years, and have a yield to maturity of 6.87 percent. What is the current yield?

4.73 percent

New Markets has $1,000 face value bonds outstanding that pay interest semiannually, mature in 14.5 years, and have a 4.5 percent coupon. The current price is quoted at 97.6. What is the yield to maturity?

$52.90

Nofal Corporation will pay a $3.65 per share dividend next year. The company pledges to increase its dividend by 5.1 percent per year, indefinitely. Required: If you require a return of 12 percent on your investment, how much will you pay for the company's stock today?

$19.01

Solar Energy will pay an annual dividend of $1.93 per share next year. The company just announced that future dividends will be increasing by 1.6 percent annually. How much are you willing to pay for one share of this stock if you require a rate of return of 11.75 percent?

call price exceeds the par value.

The call premium is the amount by which the:

$970.96

A $1,000 face value bond currently has a yield to maturity of 8.22 percent. The bond matures in five years and pays interest semiannually. The coupon rate is 7.5 percent. What is the current price of this bond?

6.51 percent

A 12-year, annual coupon bond is priced at $1,102.60. The bond has a $1,000 face value and a yield to maturity of 5.33 percent. What is the coupon rate?

asked; bid

A bond dealer sells at the _____ price and buys at the _____ price

$31.50

A bond has a par value of $1,000, a current yield of 6.25 percent, and semiannual interest payments. The bond quote is 100.8. What is the amount of each coupon payment?

bid-ask spread

A bond trader just purchased and resold a bond. The amount of profit earned by the trader from this purchase and resale is referred to as the:

brings buyers and sellers together.

A broker is an agent who

option of repurchasing the bonds prior to maturity at a prespecified price.

A call provision grants the bond issuer the:

fallen angels

A company originally issued bonds that were rated investment grade. These bonds have now been downgraded to junk status. These bonds are referred to as:

an unsecured bond

A debenture is

9.00 percent

A six-year, semiannual coupon bond is selling for $991.38. The bond has a face value of $1,000 and a yield to maturity of 9.19 percent. What is the coupon rate?

$36.27

Alexander Corp. will pay a dividend of $2.72 next year. The company has stated that it will maintain a constant growth rate of 4.5 percent a year forever. Requirement 1: If you want a return of 12 percent, how much will you pay for the stock?

$59.32

Apocalyptica Corporation is expected to pay the following dividends over the next four years: $3, $10, $15, and $3.08. Afterwards, the company pledges to maintain a constant 5 percent growth rate in dividends, forever. Required: If the required return on the stock is 11 percent, what is the current share price?

$25.51

Atlas Home Supply has paid a constant annual dividend of $2.40 a share for the past 15 years. Yesterday, the firm announced the dividend will increase next year by 10 percent and will stay at that level through Year 3, after which time the dividends will increase by 2 percent annually. The required return on this stock is 12 percent. What is the current value per share?

$20.44

Best Ever Toys just paid its annual dividend of $1.78 per share. The required return is 10.6 percent and the dividend growth rate is 1.23 percent. What is the expected value of this stock five years from now?

$3.72

Braxton's Cleaning Company stock is selling for $32.60 a share based on a rate of return of 13.8 percent. What is the amount of the next annual dividend if the dividends are increasing by 2.4 percent annually?

$9.52

Breakfast Hut pays a constant annual dividend of $1.39 per share. How much are you willing to pay for one share if you require a rate of return of 14.6 percent?

7.64%

Crossfade Co. issued 15-year bonds two years ago at a coupon rate of 6.9 percent. The bonds make semiannual payments. Required: If these bonds currently sell for 94 percent of par value, what is the YTM?

5.62 percent

Dairy Delight wants to raise $1.4 million by selling 15-year coupon bonds at par. Comparable bonds in the market have a coupon rate of 5.4 percent, semiannual payments, 15 years to maturity, and are selling at 97.8 percent of par. What coupon rate should Dairy Delight set on its bonds?

$1.50 ×(1.02)4

Delfino's expects to pay an annual dividend of $1.50 per share next year. What is the anticipated dividend for Year 5 if the firm increases its dividend by 2 percent annually?

Proxy

Kate could not attend the last shareholders' meeting and thus she granted the authority to vote on her behalf to the managers of the firm. Which term applies to this granting of authority?

$51.25

Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next nine years, because the firm needs to plow back its earnings to fuel growth. The company will then pay a dividend of $15 per share 10 years from today and will increase the dividend by 5 percent per year thereafter. Required: If the required return on this stock is 14 percent, what is the current share price?

-6.11 percent

One year ago, Alpha Supply issued 15-year bonds at par. The bonds have a coupon rate of 6.5 percent, paid semiannually, and a face value of $1,000. Today, the market yield on these bonds is 7.2 percent. What is the percentage change in the bond price over the past year?

$3.04

The common stock of Up-Towne Movers sells for $33 a share, has a rate of return of 11.4 percent, and a dividend growth rate of 2 percent annually. What was the amount of the last annual dividend paid?

Dividends that are either constant or change annually at a constant rate

The constant growth model can be used to value the stock of firms that have which type(s) of dividends?

$77.71

Requirement 2: If you want a return of 8 percent, how much will you pay for the stock?

$24.65

River Rock, Inc., just paid an annual dividend of $2.80. The company has increased its dividend by 2.5 percent a year for the past 10 years and expects to continue doing so. What will a share of this stock be worth 6 years from now if the required return is 16 percent?

6.30%

Suppose the real rate is 2.8 percent and the inflation rate is 3.4 percent. Required: What rate would you expect to see on a Treasury bill?

$903.05

The 4.5 percent bond of JL Motors has a face value of $1,000, a maturity of 7 years, semiannual interest payments, and a yield to maturity of 6.23 percent. What is the current market price of the bond?

4.96 percent

The 6 percent semiannual coupon bonds of IPO, Inc., are selling for $1,087. The bonds have a face value of $1,000 and mature in 11 years. What is the yield to maturity?

$32.50

The 6.5 percent bond of ABCO has a yield to maturity of 6.82 percent. The bond matures in seven years, has a face value of $1,000, and pays semiannual interest payments. What is the amount of each coupon payment? $30.00

7.57 percent

The 8 percent, $1,000 face value bonds of Sweet Sue Foods are currently selling at $1,057. These bonds have 16 years left until maturity. What is the current yield?

$9.63

The Sports Club plans to pay an annual dividend of $1.20 per share next year, $1.12 per share a year for the following two years, and then a final liquidating dividend of $14.20 per share four years from now. How much is one share of this stock worth to you today if you require a rate of return of 18.7 percent of this risky investment?

BBB

The lowest rating a bond can receive from Standard and Poor's and still be classified as an investment-quality bond is

yield to maturity

The market-required rate of return on a bond that is held for its entire life is called the:

bid

The price at which a dealer will purchase a bond is referred to as the _____ price.

asked

The price at which an investor can purchase in the bond market is called the _____ price.

Nominal rate

The rate of return an investor earns on a bond prior to adjusting for inflation is called the:

order flow

The stream of customer instructions to buy and sell securities is called the

Nominal rates on default-free, pure discount bonds and time to maturity

The term structure of interest rates represents the relationship between which of the following?

$2.43

This morning, you purchased a stock that will pay an annual dividend of $1.90 per share next year. You require a 12 percent rate of return and the dividend increases at 3.5 percent annually. What will your capital gain be in dollars on this stock if you sell it three years from now?

$9.43

Toy Mart recently announced that it will pay annual dividends at the end of the next two years of $1.60 and $1.10 per share, respectively. Then, in Year 5 it plans to pay a final dividend of $13.50 a share before closing its doors permanently. At a required return of 13.5 percent, what should this stock sell for today?

The bond must be priced at par.

What condition must exist if a bond's coupon rate is to equal both the bond's current yield and its yield to maturity? Assume the market rate of interest for this bond is positive.

Secondary

What is the market called that facilitates the sale of shares between individual investors?

Sinking fund

What term is used to describe an account that a bond trustee manages for the sole purpose of redeeming bonds early?

is selling at a premium

When a bond's yield to maturity is less than the bond's coupon rate, the bond:

Dirty price

Which one of the following is the price that an investor pays to purchase an outstanding bond?

Capital gains yield

Which one of the following must equal zero if a firm pays a constant annual dividend?

taxability premium

Which one of the following premiums is paid on a corporate bond due to its tax status?

liquidity premium

Which one of the following provides compensation to a bondholder when a bond is not readily marketable at its full value?

default risk premium

Which one of the following represents additional compensation provided to bondholders to offset the possibility that the bond issuer might not pay the interest and/or principal payments as expected?

A discount bond has a coupon rate that is less than the bond's yield to maturity.

Which one of the following statements is true?

zero coupon

Which one of the following terms applies to a bond that initially sells at a deep discount and only makes one payment to bondholders?